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Investors Rotate into Small Cap Energy… Stocks to Watch

The commodity space is picking up momentum as growth picks up in the developed world while stimulus and liquidity hang around with no signs of the punch bowl being taken away by policy makers any time soon.

This is the plan. Ask the Fed. The idea is to drive a “sticky” inflationary impulse into the system so central banks will finally be able to raise rates back up to 2% or higher this cycle rather than continually having to deal with the zero lower bound and new tools like QE, ZIRP, and curve control.

And they finally have a chance to win this game now that governments have gotten on board with fiscal policy at a scale capable of driving real changes in economic metabolism.

With infrastructure spending also looming, the big beneficiary in the crosshairs right now are the commodity plays. Oil is one of the most prominent in the group and hasn’t run as far ahead as industrial metals like copper and iron ore, so it may offer some strong opportunities in the weeks and months ahead.

We take a particular focus on smaller-cap energy stocks, such as Callon Petroleum Company (NYSE: CPE), SM Energy Co (NYSE: SM), Allied Energy (OTC US: AGYP), Helmerich & Payne Inc (NYSE: HP), and Patterson-UTI Energy, Inc. (NASDAQ: PTEN).

We cover a few of these names below.

 

Callon Petroleum Company (NYSE: CPE) is a good example of a smaller cap player in the energy sector that has growing operations. Like many stocks that fit this description, it was teetering on the verge of extinction following the pandemic lockdown crash a year ago. However, the stock has come roaring back, up 600% in the past six months but now nicely consolidating on the charts under the key $40 level.

The company bills itself as an independent oil and natural gas company focused on the acquisition, exploration, and development of high-quality assets in the leading oil plays of South and West Texas.

Callon Petroleum Company (NYSE: CPE) recently reported results of operations for the three months and full-year ended December 31, 2020, including full-year 2020 production of 101.6 MBoe/d (63% oil), an increase of 146% over 2019 volumes, year-end proved reserves of 475.9 MMBoe (61% oil), and net cash provided by operating activities of $559.8 million and adjusted free cash flow of $10.7 million, including net cash provided by operating activities of $368.1 million and $122.6 million of adjusted free cash flow generation over the last three quarters.

Joe Gatto, President and Chief Executive Officer commented, “In a year marked by extraordinary volatility in commodity prices and workplace challenges created by the COVID-19 pandemic, our newly integrated team executed flawlessly on a revamped set of operational and financial initiatives that ultimately delivered over $120 million of adjusted free cash flow since the beginning of the second quarter, dramatically improving our liquidity and absolute debt position. Importantly, these accomplishments were complemented by significant achievements related to employee safety and environmental emissions.”

It will be interesting to see if the stock can break out of its recent sideways action. Over the past week, the stock is net flat, and looking for something new to spark things.

Callon Petroleum Company (NYSE: CPE) managed to rope in revenues totaling $296M in overall sales during the company’s most recently reported quarterly financial data — a figure that represents a rate of top line growth of 50.9%, as compared to year-ago data in comparable terms. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($20.2M against $497.1M, respectively).

 

Allied Energy (OTCMKTS: AGYP) is another smaller cap play in the space with an interesting angle on providing value that could multiply as the price of oil rises.

The company specializes in the business of reworking and re-completing existing oil and gas wells located in mature oil and gas producing fields across the United States, with the objective of mobilizing its expertise and technology to drive higher production volumes, longer well life, and more efficient recovery of proven and available oil and gas reserves in acquired wells.

Allied Energy (OTCMKTS: AGYP) recently announced that it has signed the final agreement contract with Energy Management Resources, LLC and has acquired an 80% stake in an initial two northern Texas oil wells identified as the “Palo Pinto #1” and “Palo Pinto #2” wells. Allied Energy’s land position will allow the company to develop up to ten additional wells in the surrounding Baylor County Texas area known locally as the “Green Lease.”

Allied CEO George Montieth elaborated on the acquisition: “With this Palo Pinto acquisition and with Curtis recently joining our team as Oil Operations Manager, real oil production for Allied is now only a few short weeks away. The Company’s goal before summer is to have multiple wells at two different lease locations producing daily, with more new wells coming online throughout 2021. Allied has two important things going for it now that it has never enjoyed before: 1) Strategic funding of acquisitions, in a shareholder-friendly way, is being done with the long-term success of the Company in mind and 2) Rising oil prices that make re-completing formerly producing wells with 21st century technology highly lucrative. We are in the right industry sector at the right time and now we have the working capital to take advantage of this surging oil market while putting our years of expertise to good use. Based on the leases we now hold and others we plan to acquire I believe that Allied will strongly position itself as an oil producer within this market sector.”

The company also noted in the release that the acquisition was non-toxic on the financing side, with a non-dilutive, all-cash purchase that “immediately adds significant value to Allied’s bottom line as a new asset on the books. Based on formal due diligence completed by Ardent Oil and Gas Consultants (http://ardentoil.com) the estimated ultimate recovery of the two Palo Pinto wells is approximately 113,000 barrels of oil or about $6.7 million dollars assuming a price of $60 per barrel for crude oil.”

AGYP shares have been in a sturdy upward trend over the past three months as the company ramps up its operations. Given the potential for further outperformance in the oil space, this stock could play catch-up with other small caps in the sector as investors discover it and catalysts for the company mount.

Allied Energy (OTCMKTS: AGYP) is still in a pre-revenue phase, but it has made rapid progress this year in angling toward new production from acquired wells.

 

Helmerich & Payne Inc (NYSE: HP) designs, fabricates and operates high-performance drilling rigs in conventional and unconventional plays around the world. H&P also develops and implements advanced automation, directional drilling, and survey management technologies.

As of March 31, 2021, H&P’s fleet included 242 land rigs in the U.S., 32 international land rigs and seven offshore platform rigs.

Helmerich & Payne Inc (NYSE: HP) most recently reported earnings for its latest quarter, including news that H&P’s North America Solutions segment exited the second quarter of fiscal year 2021 with 109 active rigs up roughly 15% during the quarter, the Company ended the quarter with $562 million in cash and short-term investments and no amounts drawn on its $750 million revolving credit facility culminating in approximately $1.3 billion in available liquidity, and Quarterly North America Solutions operating gross margins increased $19 million to $64 million sequentially, as revenues increased by $48 million to $250 million and expenses increased by $29 million to $186 million.

President and CEO John Lindsay commented, “The increase in activity we experienced during the first half of our fiscal 2021 year has been encouraging, particularly in light of the record industry downturn last year. As in the past, our strong market standing and flexible financial position are enabling us to concentrate on long-term, strategic objectives during volatile and uncertain markets. We are making good progress in deploying digital technology solutions and introducing new commercial models to the industry, but realize there is still a lot of work ahead of us.”

And the stock has been acting well over recent days, up something like 6% in that time. Shares of the stock have powered higher over the past month, rallying moderately in that time on strong overall action.

Helmerich & Payne Inc (NYSE: HP) managed to rope in revenues totaling $246.4M in overall sales during the company’s most recently reported quarterly financial data — a figure that represents a rate of top line growth of -59.9%, as compared to year-ago data in comparable terms. In addition, the company has a strong balance sheet, with cash levels far exceeding current liabilities ($569.5M against $228.3M).

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